Question

Explain why a low-priced, low trading volume stock is more apt to present limits to arbitrage than is a high-priced, high trading volume stock. Please provide a detailed and informative answer.

Answer 1

High priced and high trading volume stocks are having a very high volatility and these stocks are not appropriate for arbitrage because there will be higher transaction cost and there will be also risk of stop loss getting triggered quickly because there will be a higher volatility so stop loss won't hold for long and stop loss as well as target are both achieved in such volatile market so it would be a overall loss for the company and hence arbitrating should not be done with such stocks which are highly priced and these are having higher volumes as they are giving volatile swings which will not provide adequate stability to the Arbitraging strategy.

low priced and low trading volume stock will be having a low level of volatility and higher stability in the market and hence the risk of stop loss getting triggered is very low in volatile market conditions so this will be offering as with the better arbitraging opportunity because these are having lower volatility and stable moments which are an adequate necessity for Arbitraging. There are also larger amount of spreads which are available in the lower volume and lower price which will also offer a better risk reward ratio